PROBLEM SET B
Problem 17-1B (45 minutes)
1. Plantwide overhead rate:
Engineering support
Electricity
Setup costs
Total overhead cost
$
$
56,250
112,500
41,250
210,000
÷ machine hours
Plantwide overhead rate/MH
÷150,000* MH
$
1.40/MH
x machine hours/unit
Overhead cost per unit
x
$
*Standard:
Deluxe:
3 MH/unit
4.20/unit
40,000 units x 3 MH/unit = 120,000 MH
10,000 units x 3 MH/unit = 30,000 MH
Total machine hours
150,000 MH
Direct materials cost per unit
Direct labor cost per unit
Standard: 4 DLH x $20/DLH
Deluxe: 5 DLH x $20/DLH
Overhead cost per unit
Manufacturing cost per unit
Selling price per unit
Manufacturing cost per unit
Gross profit per unit
Standard
$ 4.00
80.00
4.20
$ 88.20
100.00
4.20
$112.20
$ 92.00
88.20
$ 3.80
$125.00
112.20
$ 12.80
2. Profit per customer
Standard
Gross profit per unit
$3.80
x units per customer
Standard (40,000 units/1,000 cust.) x 40 units/cust.
Deluxe (10,000 units/1,000 cust.)
___________
Gross profit per customer
$152.00
Service cost per customer ($250,000/2,000)
Profit per customer
Deluxe
$ 8.00
125.00
$ 27.00
Deluxe
$ 12.80
x 10 units/cust.
$128.00
125.00
$ 3.00
This comparison shows that gross profit per customer exceeds service
cost per customer for both products. Thus, both products appear to be
profitable.
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Solutions Manual, Chapter 17
961
Problem 17-1B (concluded)
3. Eng. support $56,250/(50 + 25) modifications = $750/modification
Electricity
$112,500/150,000* machine hours = $0.75/machine hour
Setup
$41,250/(175 + 75) batches
= $165/batch
* From part 1
Standard
Engineering
Electricity
Setups
Total overhead
÷ units
Overhead/unit
Direct material
Direct labor
Mfg. cost/unit
50 mods. x $750
120,000 MH x $0.75
175 batches x $165
Selling price
Mfg. cost/unit
Gross profit/unit
4.
Gross profit per unit
x units per customer*
Gross profit per customer
Gross profit per customer
Service cost per customer*
Profit (loss) per customer
Deluxe
$37,500
90,000
28,875
$156,375
÷ 40,000
$
3.91
4.00
80.00
$ 87.91
$
$
25 mods. x $750
30,000 MH x $0.75
75 batches x $165
92.00
87.91
4.09
$ 18,750
22,500
12,375
$53,625
÷ 10,000
$ 5.36
8.00
100.00
$ 113.36
$ 125.00
113.36
$ 11.64
Standard
$ 4.09
x 40 units
$ 163.60
Deluxe
$ 11.64
x 10 units
$ 116.40
$ 163.60
125.00
$ 38.60
$ 116.40
125.00
$ (8.60)
*From Part 2
This analysis shows that the Standard product is in fact profitable, but
the high cost of production and service for the small volume of the
Deluxe product is unprofitable.
5. ABC gives more appropriate information to managers because it
identifies the resources consumed by each product line, and assigns
the costs of these activities accordingly. Using volume-based methods
such as the plantwide rate distorts product cost because the focus of
these methods is on the number of units of output, which may not be the
primary factor causing costs to be incurred.
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962
Financial & Managerial Accounting, 5th Edition
Problem 17-2B (25 minutes)
1.
The major costs of making the boxes are designing the boxes, setting
up machines to make the right cuts, cutting the cardboard, printing
the boxes, obtaining the cardboard material, labor, and utilities, and
shipping the boxes. Some of the costs, such as design and setup,
are not related to volume, but are related to number of different
products or number of batches. Some of the costs, such as materials
and labor, are volume-driven.
2.
Midwest has taken on more custom-made boxes for smaller-volume
customers.
3.
Yes. Midwest’s old customers bought the same type of boxes over
and over, so the design costs were spread over many units. The new
customers need different boxes for each different need, which means
that design and machine configuration costs should be spread over a
smaller number of units.
4.
Possibly. If ABC had been used rather than a volume-based system,
Midwest would have realized that small customers who want customdesigned and custom-made boxes require different activities than
than those required by existing large-volume customers. With ABC
the costs of activities associated with the special orders would be
assigned only to those orders, rather than being shared by all orders.
Midwest might have been using inaccurate cost information in setting
its selling prices.
5.
ABC gives managers information about the activities and the costs of
these activities that will help them make strategic decisions and
improve the accuracy of cost assignment.
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Solutions Manual, Chapter 17
963
Problem 17-3B (45 minutes)
1. Control levels
Wrapping
Unit level
Assembling
Unit level
Product design
Product level
Obtaining business licenses
Facility level
Cooking
Batch level
2. Wrapping
$500,000/100,000 units
$5/unit
Assembling*
$400,000/20,000 direct labor hours $20/DLH
Product design
$180,000/3,000 design hours
$60/des. hr.
Obtaining license* $100,000/20,000 direct labor hours $5/DLH
Cooking
$270,000/1,000 batches
$270/batch
* The costs of Assembling and Obtaining business licenses should NOT be combined
because they are different with respect to their control level. From part 1, assembling
is a unit level activity while obtaining business licenses is a facility level activity.
(Management can control assembly costs by changing the number of direct labor
hours, but the cost of obtaining business licenses cannot be controlled by changing
the number of direct labor hours.) Obtaining business licenses is not really driven by
the number of direct labor hours, but this basis is used in order to assign this facility
level cost to units of product.
3.
Holiday Basket
Executive Basket
Wrapping
8,000 units x $5 ............. $ 40,000 1,000 units x $5 ............. $ 5,000
Assembling
2,000 DLH x $20.............
40,000 500 DLH x $20 ...............
10,000
Product design
40 design hrs x$60 ........
2,400 40 design hrs x$60........
2,400
Obtaining Lic.
2,000 DLH x $5...............
10,000 500 DLH x $5 .................
2,500
Cooking
80 batches x $270 .........
21,600 200 batches x $270 .......
54,000
Total ovhd. cost
$114,000
$73,900
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964
Financial & Managerial Accounting, 5th Edition
Problem 17-3B (concluded)
4. Cost per unit
Total overhead cost
÷ Units produced
Overhead cost per unit
Holiday Basket
$114,000
÷8,000 units
$14.25
5. Plantwide overhead rate
Wrapping ($300,000 + $200,000)
Assembling
Product Design
Obtaining business license
Cooking ($150,000 + $120,000)
Total overhead
Executive Basket
$73,900
÷1,000 units
$73.90
$
500,000
400,000
180,000
100,000
270,000
$ 1,450,000
÷ Total direct labor hours
Overhead rate per DLH
÷20,000 DLH
$
72.50
Holiday Basket
Overhead assigned (2,000 DLH x $72.50/DLH)
÷ units
Overhead cost per unit (rounded)
$
145,000
÷8,000 units
$
18.13
Executive Basket
Overhead assigned (500 DLH x $72.50/DLH)
÷ units
Overhead cost per unit
$
36,250
÷1,000 units
$
36.25
6.
Holiday Basket
Activity based cost per unit
$14.25
Plantwide cost per unit
$18.13
Executive Basket
$73.90
$36.25
The plantwide overhead rate assigns too much cost to the Holiday
Basket (which is a comparatively high-volume product) and understates
the cost of the Executive Basket because it is a low-volume product.
The ABC costs more accurately reflect the costs of these products
because activity-based costing focuses on the consumption of
resources and assigns costs accordingly, whereas volume-based
costing (such as the plantwide rate) assigns costs based on measures
associated with number of units of output.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 17
965
Problem 17-4B (30 minutes)
1. Components
Assembly labor
Maintenance
Packaging materials
Shipping
Machine setup
*Fun with Fractions:
Count Calculus:
$495,000/(450,000 + 100,000) parts
$244,800/(15,000 + 2,000) DLH
$100,800/(5,000 + 2,000) MH
$460,800/(150,000 + 10,000) boxes
$27,360/1,900* cartons
$187,200/(52 + 52) setups
$0.90/part
$14.40/DLH
$14.40/MH
$2.88/box
$14.40/ctn.
$1,800/setup
150,000 units/100 units per carton = 1,500 cartons
10,000 units/ 25 units per carton = 400 cartons
Total cartons
1,900 cartons
Fun with Fractions
Count Calculus
Components
450,000 parts x $0.90 . $
405,000 100,000 parts x $0.90 $ 90,000
Assembly
15,000 DLH x $14.40 ...
216,000 2,000 DLH x $14.40 ....
28,800
Maintenance
5,000 MH x $14.40 ......
72,000 2,000 MH x $14.40......
28,800
Packaging
150,000 boxes x $2.88
432,000 10,000 boxes x $2.88 .
28,800
Shipping
1,500 cartons x $14.40
21,600 400 cartons x $14.40 .
5,760
Set-ups
52 set-ups x $1,800 ....
93,600 52 set-ups x $1,800 ...
93,600
Total cost
2. Cost per unit
$1,240,200
Fun with Fractions
$275,760
Count Calculus
Total manufacturing cost
$1,240,200
$275,760
÷ number of units
÷150,000 units
÷10,000 units
Average manufacturing cost per unit $8.27
3. Selling price of Count Calculus
Cost/unit
Profit/unit
$27.58
$59.95
27.58
$32.37
4. Since the cost associated with Fun with Fractions is $8.27, the price
should be at least $8.27 to cover these costs. A higher price would
make the product profitable.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
966
Financial & Managerial Accounting, 5th Edition
Problem 17-5B (50 minutes)
1. Total overhead
Total direct labor hours
= $215,630 + $399,480 + $515,600
2,600 DLH + 1,600 DLH
= $1,130,710 = $269.22/DLH (rounded)
4,200 DLH
Pup Tent
Pop-Up Tent
Overhead cost by product line
Pup: 2,600 DLH @ $269.22/DLH
$699,972*
Pop-Up: 1,600 DLH @ $269.22/DLH
÷ Number of units produced
15,200 units
$430,752*
7,600 units
Overhead cost per unit (rounded)
$56.68
$46.05
*($699,972 + 430,752 = $1,130,724; $14 rounding error)
2. Total manufacturing cost per unit:
Direct materials and direct labor
Manufacturing overhead
Total manufacturing cost per unit
$25.00
46.05
$71.05
$32.00
56.68
$88.68
3. Gross profit per unit
Selling price per unit
Manufacturing cost per unit
Gross profit (loss) per unit
$65.00
71.05
$ (6.05)
$200.00
88.68
$111.32
It appears that the Pup Tent is not profitable and management may
decide to eliminate this product line if it cannot reduce cost (or raise the
selling price) to generate a profit.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 17
967
Problem 17-5B (continued)
4. Pattern alignment
$64,400/560 batches
$115/batch
Cutting
$50,430/12,300 machine hours
$4.10/MH
Moving product
$100,800/2,400 moves
$42/move
Sewing
$327,600/4,200 direct labor hours $78/DLH
Inspecting
$24,000/600 inspections
$40/inspection
Folding
$47,880/22,800 units
$2.10/unit
Design
$280,000/280 mod. orders
$1,000/mod.order
Providing space
$51,600/8,600 square feet
$6/sq. ft.
Material handling
$184,000/920,000 square yards
$0.20/sq. yd.
Pup Tent
Pop-Up Tent
Pattern alignment 140 batches x $115 ..........
$ 16,100 420 batches x $115 ..........
$ 48,300
Cutting
7,000 MH x $4.10 ..............28,700 5,300 MH x $4.10 ..............21,730
Moving product
800 moves x $42 ..............33,600 1,600 moves x $42 ...........67,200
Sewing
2,600 DLH x $78 ...............
202,800 1,600 DLH x $78 ...............
124,800
Inspecting
240 insp. x $40 ................. 9,600 360 insp. x $40 .................14,400
Folding
15,200 units x $2.10 .........31,920 7,600 units x $2.10 ...........15,960
Designing
70 mods. x $1,000 ............70,000 210 mods. x $1,000 ..........
210,000
Providing space
4,300 sq. ft. x $6 ...............25,800 4,300 sq. ft. x $6 ...............25,800
Material handling
450,000 sq.yd. x $0.20 ....... 90,000 470,000 sq.yd. x $0.20 ........94,000
Total overhead
$508,520
$622,190
÷ units
÷ 15,200
÷
7,600
Overhead per unit*
$
$
81.87
DM and DL per unit
Mfg. cost per unit
$
33.46
25.00
32.00
58.46
$ 113.87
*rounded
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
968
Financial & Managerial Accounting, 5th Edition
Problem 17-5B (concluded)
5.
Selling price
Manufacturing cost per unit
Gross profit per unit
Pup Tent
Pop-Up Tent
$65.00
$200.00
58.46
113.87
$ 6.54
$ 86.13
Both product lines are profitable without any cost cutting. The ABC cost
assignment method more accurately reflects the costs associated with
each product line because it is based on the consumption of the
activities that cause costs to be incurred, whereas the plantwide
overhead rate bases cost assignment on volume-related factors.
6. Departmental overhead rates based on direct labor hours and machine
hours are still volume-based measures and would not improve the
accuracy of cost assignment relative to ABC. Departmental overhead
rates may be an improvement over a plantwide rate because the
departmental rates at least recognize differences in drivers between
departments.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 17
969